Pension lending faces strict regulation in Vermont
MONTPELIER -- Vermont is looking to curb a new predatory loan practice that targets retirees.
Online advertisements for "pension loans" or "pension advances" started cropping up on Vermont websites in the last year or so, says Jay Sushelsky, a senior attorney for AARP in Washington, D.C.
Most pensioners are retirees, but military veterans also can fall prey to the scam. Ads offer lump-sum cash advances in exchange for monthly pension checks - often with usurious interest rates, hidden fees and other obligations that put retirees in a losing position.
It's typically a loan "of last resort" that worsens a situation for people who are already vulnerable, Sushelsky told the House Committee on Commerce and Community Development Friday.
"If they were desperate to make a loan and these were the only asset they had I think it's clear within a very short time after, the person would be more desperate, not less," Sushelsky said.
What's more, the lenders try to get around existing regulations by saying their schemes are not loans.
"They could call it a pineapple for all I care," Department of Financial Regulation Commissioner Susan Donegan told the committee. "We look at the practice. It doesn't matter what you're calling something. If you look at the results, it's a loan."
If the proposal now in the Legislature passes, Vermont would be the first state to pass a regulation specifically geared toward pension lending. The predatory practice came out of the shadows in 2013 with the publication of aNew York Times expose.
Under S.223, the state would not ban pension lending, but would instead require companies to become licensed lenders. Sen. Kevin Mullin, R-Rutland, sponsored the bill.
Donegan said licensure solidifies her office's and the Attorney General's authority to go after pension lenders who violate existing statutes such as truth-in-lending requirements, prohibitions against unfair and deceptive practices, and caps on interest rates.
"If they seek (a license), it gives us the chance to deny it if their business model is inappropriate," Donegan said. If a lender were to obtain a license but violate the regulations, or issue pension loans without a license, he or she could face penalties.
The fine for unlicensed lending is up to $10,000 per violation - including solicitations. That means even advertisements appearing online today could get pension lenders in trouble in Vermont, according to assistant attorney general Naomi Sheffield.
"The purpose of this (bill) is to confirm what we feel we already have in place," Sheffield told the committee Friday.
Victims also could file suit privately. There have been no known cases of pension lending in the state, according to officials. The legislation is proactive.
"As a regulatory agency, we often are reactive and the law is catching up to what's going on in the marketplace. I think getting ahead of things is good," Donegan said. "Let's go for it."
State Treasurer Beth Pearce also supports the bill.
"We believe they're unregulated, predatory and they undermine the financial security of our seniors," Pearce testified. The fact that Vermont's population is aging magnifies that danger, she said.
When people are financially secure in retirement, they purchase goods and services without relying on public assistance. Pearce said "siphoning off dollars" from retirement accounts ends up costing both the state and federal governments.
"It's an awful picture not just for the individual, but for the state as well," she said.
Pensions already are regulated to prevent predatory practices. Most cannot be assigned to third parties, for example.
Pension lenders get around that by requiring the pensioner to open a joint checking account with them. The recipient has their monthly pension checks deposited into the joint account. As soon as it hits, an automatic transfer moves the money to a different account belonging only to the lender.
Pension lenders usually require a life insurance policy too, in case the pensioner dies before the loan is paid off, according to Jay Sushelsky a senior attorney for AARP.
Chris D'Elia, president of the Vermont Bankers Association, said his organization fully supports the bill as it passed the Senate. A responsible lending institution or private lender would never issue such a loan, he said.
The regulation would not interfere with legitimate pension financing, D'Elia said. Some people arrange major purchases by having automatic payments deducted from the same account their monthly pension payments go to, for example. That practice would still be allowed.
And even a pension loan more along the lines of the joint account with fees and interest payments could theoretically be permissible.
Legislative Council director Luke Martland testified that discussion of S.223 had included the possibility of an outright ban. Ultimately, the parties involved did not want to forbid the transaction in case of a situation in which it might be appropriate.
Rep. Bob Bouchard, R-Colchester, decided Friday he supports the bill, though he is concerned that pension loans technically still can be made.
"Not quite as severe, but it can still happen," Bouchard said. "But it is nice to know that they're being watched."
The bill, which unanimously passed the Senate, got a green light in the House committee Friday. It will go next to the full House for a vote.
For a list of reported scams, suspicious loans or unlicensed lenders in Vermont, see the Department of Financial Regulation's unlicensed lenders page. To make a consumer complaint, visit the Attorney General's Consumer Assistance Program, run by the University of Vermont.
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